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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______.
Commission File Number 1-12793
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STARTEK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1370538
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
111 HAVANA STREET
DENVER, COLORADO 80010
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(Address of principal executive offices) (Zip code)
(303) 361-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 24, 1999, 13,828,571 shares of common stock were outstanding and
held by approximately 1,394 holders. The aggregate market value of common stock
held by non-affiliates of the registrant on such date was approximately $21.7
million, based upon the closing price of the Company's common stock as quoted on
the New York Stock Exchange composite tape on such date. Shares of common stock
held by each executive officer and director and by each person who owned 5% or
more of the outstanding common stock as of such date have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
Proxy Statement to be delivered in connection with its 1999 Annual Meeting of
Stockholders. With the exception of certain portions of the Proxy Statement
specifically incorporated herein by reference, the Proxy Statement is not deemed
to be filed as part of this Form 10-K.
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FORWARD-LOOKING STATEMENTS
All statements contained in this Form 10-K that are not statements of
historical facts are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve substantial risks and
uncertainties. Forward-looking statements are preceded by terms such as "may",
"will", "should", "anticipates", "expects", "believes", "plans", "future",
"estimate" "continue", and similar expressions. The following are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements; these include, but are
not limited to, general economic conditions in the Company's markets, the loss
of the Company's principal client(s), the loss or delayed implementation of a
large project which could cause quarterly variation in the Company's revenues
and earnings, difficulties of managing rapid growth, dependence on key
personnel, dependence on key industries and the trend toward outsourcing, risks
associated with the Company's contracts, risks associated with rapidly changing
technology, risks of business interruption, risks associated with international
operations and expansion, dependence on labor force, the year 2000 issue, and
highly competitive markets. These factors include risks and uncertainties beyond
the Company's ability to control; and, in many cases, the Company and its
management cannot predict the risks and uncertainties that could cause actual
results to differ materially from those indicated by use of forward-looking
statements. All forward-looking statements herein are qualified in their
entirety by the information set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations"--"Factors That May Affect
Future Results" appearing elsewhere in this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
StarTek, Inc. (the "Company" or "StarTek") is a leading international
provider of integrated, value-added, outsourced process management services
primarily for Fortune 500 companies. The Company's process management services
encompass a wide spectrum of service platforms, including logistics management
(selection and management of suppliers), management of product assembly and
packaging, E-commerce order processing and fulfillment, Internet support,
product distribution, direct store distribution, warehouse services and
inventory management, inbound technical support and customer care teleservices,
telecommunications process management, and product order processing. By focusing
on these services as its core business, StarTek allows its clients to focus on
their primary business, reduce overhead, replace fixed costs with variable costs
and reduce working capital needs. The Company has continuously expanded its
business and facilities to offer additional services on an outsourced basis in
response to the growing needs of its clients and to capitalize on market
opportunities, both domestically and internationally.
StarTek's goal is to continue to grow profitably by focusing on
providing high-quality, integrated, value-added, outsourced process management
services. StarTek has a strategic partnership philosophy, through which it
assesses each of its client's needs and, together with its clients, develops and
implements customized outsourcing solutions. Management believes that its
entrepreneurial culture, long-term relationships with clients and suppliers,
efficient operations, dedication to quality, and use of advanced technology and
management techniques provide StarTek a competitive advantage in attracting
clients that outsource non-core operations. StarTek's largest two clients, based
on 1998 revenues, have utilized StarTek's outsourced services since 1996 and
1987.
StarTek's existing clients are primarily in the computer software,
Internet, E-commerce, computer hardware, technology, and telecommunications
industries which are characterized by rapid growth, complex and evolving product
offerings, and large customer bases, which require frequent, often
sophisticated, customer interaction. Currently, the Company is also targeting
financial services, transportation, consumer products, and health care
companies. Management believes there are substantial opportunities to cross-sell
StarTek's wide spectrum of outsourced process management services to its
existing and future client base. The Company intends to capitalize on the
increasing trend toward outsourcing by focusing on potential clients in
additional industries which could benefit from the Company's expertise in
developing and delivering integrated, cost-effective outsourced services.
StarTek currently has five facilities in Colorado, four of which are
operational and one of which is currently anticipated to be operational during
the second quarter of 1999. StarTek also has one facility each in Wyoming and
Tennessee. The Company's Europe operations are performed from its facility in
Hartlepool, England. The Company also operates through a subcontract
relationship in Singapore. The Company has announced plans to search for an
additional facility, which is currently expected to be operational during the
second half of 1999.
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The Company's business was founded in 1987 and through its wholly-owned
subsidiaries, has been providing outsourced process management services since
inception. On December 30, 1996, StarTek, Inc. was incorporated in Delaware and
in June 1997, StarTek completed an initial public offering of its common stock.
Prior to December 30, 1996, StarTek USA, Inc. and StarTek Europe, Ltd.
(previously named StarPak, Inc. and StarPak International, Ltd., respectively,
both of which became wholly-owned subsidiaries of the Company in January 1997
and are Colorado corporations) conducted business as affiliates under common
control. In 1998, the Company formed StarTek Pacific, Ltd., a Colorado
corporation and Domain.com, Inc., a Delaware corporation, both of which are also
wholly-owned subsidiaries of the Company. StarTek, Inc. is a holding company for
the businesses conducted by its four wholly-owned subsidiaries. StarTek's
principal executive offices are located at 111 Havana Street, Denver, Colorado
80010 and its telephone number is (303) 361-6000. StarTek's home page on the
Internet can be located at www.startek.com.
STARTEK'S INTEGRATED SERVICE PLATFORMS
The Company's interaction with a client's customers may begin with an
inbound call or message via the Internet requesting information or placing an
order for the client's product. A StarTek service representative takes the
order, and if the Company manages the client's inventory, the Company packs and
ships the order. If the Company does not manage the client's inventory, the
Company transmits the customer's request directly to the client. In the event
the Company manages the client's inventory, the Company may receive finished
goods directly from the client or the Company may manage the production process
on an outsourced basis, following product specifications provided by the client.
In the latter case, the Company selects and contracts with the necessary
suppliers and performs all tasks necessary to assemble and package the finished
product, which may be held by the Company pending receipt of customer orders or
shipped in bulk to distributors or retail outlets.
The Company's clients typically provide their customers with telephone
numbers for a variety of product, technical support, and service questions.
Calls are routed to StarTek technical support or customer care service
representatives who have been trained to support specific products and services.
A call may also lead to an order for another product or service offered by the
client, in which case the Company takes the order and the cycle begins again.
StarTek's clients may utilize one or more of the Company's service platforms.
BUSINESS STRATEGY
StarTek's strategic objective is to increase revenues and earnings by
maintaining and enhancing its position as a leading international provider of
integrated, value-added, outsourced process management services.
To reach this objective, the Company intends to:
Provide Integrated, Outsourced Process Management Services. StarTek
seeks to provide integrated, outsourced process management services which enable
its clients to provide their customers with high-quality services at lower cost
than through a client's own in-house operations. The Company believes that its
ability to tailor operations, materials, and employee resources objectively and
to provide process management services on a cost-effective basis will allow the
Company to become an integral part of its clients' businesses.
Develop Strategic Partnerships and Long-Term Relationships. StarTek
seeks to develop long-term client relationships, primarily with Fortune 500
companies. The Company invests significant resources to establish strategic
partnership relationships and to understand each client's processes, culture,
decision, parameters and goals, so as to develop and implement customized
solutions. The Company believes this solution-oriented, value-added integrated
approach to addressing its clients' needs distinguishes StarTek from its
competitors and plays a key role in the Company's ability to attract and retain
clients on a long-term basis.
Maintain Low-Cost Position through the StarTek Process Management
System. StarTek strives to establish a competitive advantage by frequently
redefining its operational process to reduce cost and improve quality. The
Company believes its continuous improvement philosophy and modern process
management techniques enable the Company to reduce waste and increase efficiency
in the following areas: (i) controlling overproduction; (ii) minimizing waiting
time due to inefficient work sequences; (iii) reducing inessential handling of
materials; (iv) eliminating nonessential movement and processing; (v)
implementing fail-safe processes; (vi) improving inventory management; and (vii)
preventing defects.
Emphasize Quality. StarTek strives to achieve the highest quality
standards in the industry. To this end, the Company, through certain of its
wholly-owned subsidiaries, has received ISO 9002 certifications, an
international standard for quality assurance and consistency in operating
procedures, for substantially all of its facilities and services. Certain of the
Company's existing clients require evidence of ISO 9002 certification prior to
selecting an outsourcing provider.
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Capitalize on Sophisticated Technology. The Company believes it has
established a competitive advantage by capitalizing on sophisticated technology
and proprietary software, including automatic call distributors, inventory
management software, transportation management software, call tracking systems,
and telephone-computer integration software. The Company further believes these
capabilities enable StarTek to improve efficiency, serve as a transparent
extension of its clients, receive telephone calls and data directly from its
clients' systems, and report detailed information concerning the status and
results of the Company's services and interaction with clients on a daily basis.
SERVICE PLATFORMS
The Company offers a wide spectrum of service platforms, which are
designed to provide cost-effective and efficient management of portions of its
clients' operations. The Company works closely with its clients to develop,
refine, and implement efficient and productive integrated outsourced solutions
that link StarTek with its clients and their customers. The processes that
create such solutions generally include the development of product manufacturing
specifications, packaging, and distribution requirements, as well as
product-related software programs for telephone, facsimile, E-mail, and Internet
interactions involving product order processing and fulfillment, and technical
support and customer care. Substantially all of the Company's process-related
teleservices activities are inbound telephone calls, rather than outbound calls.
Specific services StarTek provides to its clients include, but are not
necessarily limited to:
Product Order Processing. Product order processing is generally the
process by which a call or an Internet message from a client's customer is
received, identified and routed to a StarTek service representative. Typically,
a customer calls or E-mails to request product service information, to place an
order for an advertised product, or to obtain assistance regarding a previous
order or purchase. The information and results of the message are then
communicated either to StarTek's employees for order processing and fulfillment
or, if StarTek does not manage the client's inventory, the Company transmits the
customer's request directly to the client. For telephone calls, StarTek utilizes
automated call distributors to identify each inbound call by the number dialed
by the customer and immediately route the call to a StarTek service
representative trained for that product. Product orders also occur as a result
of a customer visiting the web site of a client and placing orders which are
received by StarTek or a StarTek service representative offering products in
connection with a technical support or customer care call. To facilitate product
orders, the Company can process credit card charges and other payment methods in
connection with its product order processing.
Supplier Management. Company personnel are responsible for maintaining
and managing multiple supplier relationships. When the Company is selected by a
client to provide product assembly and packaging services, the Company
qualifies, selects, certifies, and manages the sourcing and manufacturing of the
various products and related components including, among other things, the
printing of boxes, labels, manuals and other printed materials to be included
with the client's product, and the mass duplication of software onto various
media. Such products and related components are then assembled and packaged at
certain of the Company's facilities. The Company monitors the quality of its
suppliers through visits to manufacturing facilities and utilizes just-in-time
production to minimize inventory in the Company's warehouses. Management
believes that the Company's strong, long-term relationships with multiple
suppliers allows the Company to be flexible and responsive to its clients, while
minimizing costs and the Company's dependency on any single supplier.
Product Assembly and Packaging. The Company assembles and packages
products in various containers, including folding cartons, set-up boxes, compact
disc jewel cases, digi-packs, binders, and slip cases. The Company assembles and
packages products in the United States, the United Kingdom, and Singapore. The
Company's assembly lines have been designed with significant flexibility,
enabling the Company to assemble and package various types of products and
rapidly change the type of product produced. During peak periods of operations,
the Company's capacity is dependent upon (i) the complexity of the product to be
assembled; (ii) the availability of materials from suppliers; (iii) the
availability of temporary personnel to increase capacity; (iv) the number of
shifts operated by the Company; and (v) the ability to activate additional
production lines.
Product Distribution. The Company's inventory management systems enable
the Company to ship and track products to distribution centers, individual
stores, and its clients' customers directly. Product orders are received by the
Company via file transfer protocol (FTP), the Internet, electronic data
interchange (EDI), and facsimile, as well as through the Company's product order
teleservices and E-commerce support services described elsewhere.
E-commerce and Product Order Fulfillment. StarTek personnel process,
pack, and ship product orders and requests for promotional and educational
literature, and direct customers of the Company's clients to product or service
sources ("fulfillment") by telephone, E-mail, facsimile, and the Internet, 24
hours per day, seven days per week. The Company provides same-day shipping of
customer orders if the product is available.
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Technical Support Teleservices. StarTek service representatives provide
technical support services by telephone, E-mail, facsimile, and the Internet, 24
hours per day, seven days per week. Technical support inquiries are generally
driven by a customer's purchase of a product or by a customer's need for ongoing
technical assistance. Customers of StarTek's clients dial a technical support
number listed in their product manuals and, based on touch-tone responses, are
automatically connected to an appropriate StarTek service representative who is
specially trained in use of computerized knowledge databases for the applicable
product. Each StarTek service representative acts as a transparent extension of
the client when resolving complaints, diagnosing and resolving product or
service problems, or answering technical questions.
Customer Care Teleservices. Customer care programs are customized by
the Company to meet its clients' needs. The Company customizes responses to
various customer product inquiries by designing special greetings, marketing
messages, and specific queue-time controls. A StarTek service representative
receiving a call or an E-mail message can enter customer information into the
Company's call-tracking system, answer questions, and quickly access a
proprietary networked knowledge database via personal computer to locate an
answer to a customer's question. A senior quality control team member is
available to provide additional assistance for complex or unique customer
questions. As additional product information becomes available, the Company
promptly integrates such information into its knowledge database, thereby
ensuring that answers are based upon the latest product information.
Each customer interaction presents the Company and its clients with an
opportunity to gather valuable customer information, including the customer's
demographic profile and preferences. This information can prompt the StarTek
service representative to make logical, progressive inquiries about the
customer's interest in additional products and services, identify additional
revenue generating and cross-selling opportunities, or resolve other issues
relating to a client's products or services.
Telecommunication Process Management. StarTek personnel are responsible
for managing installation and providing on-going support services for large
scale telecommunications networks for its client's customers, most of whom are
Fortune 1000 companies. Service representatives manage the relationships between
StarTek's client and its customers on a transparent basis. StarTek's
installation management and on-going network support services, on an outsourced
basis, enable its client to provide telecommunications services to customers
more efficiently and cost effectively.
INTERNATIONAL OPERATIONS
StarTek provides process management services on an international basis
from the United Kingdom and Singapore. The Company's facility in the United
Kingdom provides most of the Company's outsourced service platforms for clients
throughout Europe, including supplier management, product assembly and
packaging, product distribution, product order fulfillment, product order
processing, inbound technical support and customer care services in several
languages. The Company currently provides supplier management, product assembly,
and packaging and product distribution for one of its principal clients through
a subcontract relationship with a company in Singapore. The subcontract
relationship generally operates on a purchase order basis. International
operations generated approximately 13.9% of the Company's total revenues during
1998, which, in large part, was a result of the revenues derived from the
Company's relationship with one of its principal clients in Singapore. See Note
14 to the consolidated financial statements set forth herein for a further
description of revenues, operating profit and identifiable assets classified by
the major geographic areas in which the Company operates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"--
"Factors That May Affect Future Results" set forth herein for a discussion of
"Risks Associated with International Operations and Expansion".
CLIENTS
StarTek provided services to approximately 75 clients during 1998.
StarTek's current client base consists of companies engaged primarily in the
computer software, Internet, E-commerce, computer hardware, technology, and
telecommunications industries. However, the Company is currently also targeting
companies in the financial services, transportation, consumer products, and
health care industries. Microsoft Corporation ("Microsoft") accounted for
approximately 56.3% and 72.5% of the Company's revenues during the years ended
December 31, 1997 and 1998, respectively. Hewlett-Packard Company
("Hewlett-Packard") accounted for approximately 25.4% of the Company's revenues
during the year ended December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results" set forth herein for a further discussion of the
Company's "Reliance on Principal Client Relationships" and "Risks Associated
with the Company's Contracts".
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SALES AND MARKETING
The Company's marketing objective is to develop long-term relationships
with existing and potential clients to become the preferred worldwide provider
of outsourced services. StarTek invests significant resources to create a
strategic partnership with its clients to understand their existing operations,
customer service processes, culture, decision parameters, and goals. A StarTek
team assesses the client's outsourcing service needs, and, together with the
client, develops and implements customized solutions. Management believes that,
as a result of StarTek's strategic relationship with its clients and
comprehensive understanding of their businesses, the Company can identify new
revenue generating opportunities, customer interaction possibilities, and
product service improvements not adequately addressed by the client. The
Company's sales strategy emphasizes multiple contacts with a client to
strengthen its relationship and facilitate the cross-selling of services.
StarTek markets its outsourced services through a variety of methods,
including personal sales calls, client referrals, attendance at trade shows,
advertisements in industry publications, and cross-selling of services to
existing clients. As part of its marketing efforts, the Company encourages
visits to its facilities, where the Company demonstrates its services, quality
procedures, and ability to accommodate additional business.
Management believes a key element to sales growth is the ability to
flexibly, effectively, and efficiently expand service capacity to meet client
needs as its clients grow or outsource more of their non-core operations to the
Company. In addition, to attract new clients to StarTek's services, the Company
must have the resources to develop a strategy to meet new clients' outsourcing
goals promptly, as well as the ability to implement operations for such clients
quickly and accurately.
TECHNOLOGY
The Company employs technology and proprietary software that
incorporates digital switching, relational knowledge database management
systems, call tracking systems, workforce management systems, object-oriented
software modules, and computer telephony integration. The Company's digital
switching technology is designed to enable calls to be routed to the next
available teleservice representative with the appropriate product knowledge,
skill, and language abilities. Call tracking and workforce management systems
generate and track historical call volumes by client, enabling the Company to
schedule personnel efficiently, anticipate fluctuations in call volume and
provide clients with detailed information concerning the status and results of
the Company's services on a daily basis. Management believes that the Company's
proprietary technology platform provides the Company with a competitive
advantage in maintaining existing clients and attracting new clients. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"-- "Factors That May Affect Future Results" set forth herein for a
discussion of "Risks Associated with Rapidly Changing Technology".
EMPLOYEES AND TRAINING
StarTek's success in recruiting, hiring, and training large numbers of
full-time skilled employees and obtaining large numbers of hourly and temporary
employees during peak periods is critical to the Company's ability to provide
high quality outsourced services. To maintain good employee relations and to
minimize turnover, the Company offers competitive pay, hires employees who are
eligible to receive the full range of employee benefits, and provides employees
with clear, visible career paths. To meet its service objectives, the Company
also utilizes temporary services. As of December 31, 1998, the Company had
approximately 2,155 full-time equivalent employees. The number of temporary
employees varies substantially due to the seasonal variations of the Company's
business. Management believes that the demographics surrounding its facilities,
its reputation, stability, and compensation plans should allow the Company to
continue to attract and retain qualified employees. However, the Company
operates in some locations where unemployment levels are currently at low levels
compared to historic norms. If low unemployment levels continue to persist in
these areas, the Company's ability to attract qualified employees could be
adversely affected. The Company believes its current operations in six separate
locations, with a seventh location being added in Grand Junction, Colorado,
should reduce this exposure. The Company considers its employee relations to be
good. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of factors relating to the Company's "Dependence on
Labor Force" and "Dependence on Key Personnel".
In keeping with StarTek's continuous improvement philosophy, the
Company is committed to training all of its employees. StarTek provides formal
training for senior management, supervisors, process managers, quality
coordinators, and service representatives. StarTek also maintains an employee
quality program to backup every employee, including specialized quality
coordinators who teach problem solving, assist with service calls, and offer
immediate performance feedback. On a more informal basis, the Company provides
on-the-job process training and tutoring for all product assembly and packaging
personnel. Employee teams gather daily to receive information about products to
be produced and techniques to be utilized, and have an opportunity to ask
questions and receive one-on-one training, as necessary.
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The Company's in-house training programs for technical support,
customer care, and telecommunications process management employees involve an
in-depth, structured learning environment that builds technical competence and
teaches critical software skills necessary to provide effective services to its
clients. Each service representative is specially designated and trained to
support a particular product or group of products for a particular client. These
client service representatives receive training in product knowledge, call
listening, and computer skills prior to answering any customer calls
independently. This training time depends on the complexity of the product for
which such representative will provide services. Further, the Company uses live
and taped call reviews and customer feedback surveys to continue to monitor and
enhance its level of customer support services.
INDUSTRY AND COMPETITION
StarTek continues to believe that businesses throughout the world are
increasingly focusing on their core businesses and are increasingly engaging
outsourcing service companies to perform specialized, non-core functions and
services. Outsourcing of non-core activities offers a strategic advantage to
companies in a wide range of industries by offering them an opportunity to
reduce operating costs and working capital needs, improve their reaction to
business cycles, manage capacity and improve customer and technical information
gathering and utilization. To realize these advantages, companies are
outsourcing the process of planning, implementing, and controlling the efficient
flow of goods, services, teleservices and related information from the point of
origin to the point of consumption. Additionally, rapid technological changes
and rising customer expectations for high-quality goods and services make it
increasingly difficult and expensive for companies to maintain the necessary
personnel and product capabilities in-house to support a product's life-cycle on
a cost-effective basis. Companies which focus on providing these services as
their core business, including StarTek, are expected to continue to benefit from
these outsourcing trends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"-- "Factors That May Affect Future Results"
set forth herein for a discussion of the Company's "Highly Competitive Market".
StarTek competes on the basis of quality, reliability of service,
price, efficiency, speed and flexibility in tailoring services to client needs.
Management believes its comprehensive and integrated services differentiate it
from its non-client competitors who may only be able to provide one or a few of
the outsourced services that StarTek provides. The Company continuously explores
new outsourcing service opportunities, typically in circumstances where clients
are experiencing inefficiencies in non-core areas of their businesses and
management believes it can develop a superior outsourced solution to such
inefficiency on a cost-effective basis. Management believes that it competes
primarily with the in-house process management operations of its current and
potential clients. Such in-house operations include Internet operations,
teleservices, customer support services, logistics management, packaging and
assembling, distribution, and warehousing. StarTek also competes with certain
companies that provide similar services on an outsourced basis. There are
numerous competitors of all sizes that provide product order teleservices and
product fulfillment distribution services.
ITEM 2. PROPERTIES
FACILITIES
StarTek's principal executive offices are located in Denver, Colorado.
Currently, StarTek owns and operates (unless otherwise noted) the following
facilities, containing an aggregate of approximately 735,000 square feet:
YEAR
OPENED OR SQUARE LEASED, COMPANY OWNED, OR
PROPERTIES ACQUIRED FEET OTHERWISE
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U.S. Facilities
Greeley, Colorado 1987 100,000 Company Owned
Greeley, Colorado 1993 10,500 Company Owned
Denver, Colorado 1995 138,000 Company Owned
Greeley, Colorado 1998 35,000 Company Owned
Laramie, Wyoming 1998 22,000 Company Owned
Clarksville, Tennessee 1998 305,000 Company Owned(a)
Grand Junction, Colorado 1999 46,350 Leased
International Facilities
Hartlepool, England 1993 53,000 Leased
Singapore 1995 25,000 Subcontractor Relationship
------------------------------
(a) See Note 8 to the consolidated financial statements set forth herein for a
description of the Tennessee financing arrangement.
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Substantially all of the Company's facility space can be used to support a
number of the Company's process management service platforms. The Company has
announced plans to search for an additional facility, which is currently
expected to be operational during the second half of 1999. Management believes
StarTek's existing facilities are adequate for the Company's current operations,
but continued capacity expansion will be required to support continued growth.
Management intends to maintain a certain amount of excess capacity to enable it
to readily provide for the needs of new clients and the increased needs of
existing clients. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"-- "Factors That May Affect Future Results"
set forth herein for a discussion of "Risks of Business Interruptions".
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation arising in
the normal course of business, none of which is currently expected by management
to have a material adverse effect on the Company's business, financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF COMMON STOCK
StarTek's common stock has been traded under the symbol "SRT" on the
New York Stock Exchange since June 19, 1997, the effective date of the Company's
initial public offering. The high and low closing sale prices of the Company's
common stock for 1997 and 1998 were:
1997 HIGH LOW
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Second Quarter (beginning June 19, 1997) 16 3/8 14
Third Quarter 16 1/8 11 1/4
Fourth Quarter 14 3/8 10 5/8
1998 High Low
---- ---- ---
First Quarter 12 1/8 9 1/8
Second Quarter 13 11 9/16
Third Quarter 12 11/16 8 5/8
Fourth Quarter 12 3/8 8 1/16
The closing sale price for StarTek's common stock on March 24, 1999 was
$10.50. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of "Volatility of Stock Price".
HOLDERS OF COMMON STOCK
As of March 24, 1999, there were approximately 1,394 stockholders of
record of the Company's common stock and 13,828,571 shares of common stock
outstanding. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of "Control by Principal Stockholders".
DIVIDEND POLICY
The Company currently intends to retain all future earnings in order to
finance continued growth and development of its business and does not expect to
pay any cash dividends with respect to its common stock in the foreseeable
future. The payment of any dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the availability of
funds, future earnings, capital requirements, contractual restrictions, the
general financial condition of the Company and general business conditions.
Under its $5 million line of credit, the Company may not pay dividends in an
amount, which would cause a failure to meet its financial covenants. See Note 6
to the consolidated financial statements set forth herein and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"--"Liquidity and Capital Resources" set forth herein for a
description of these financial covenants.
7
9
SALES OF UNREGISTERED SECURITIES
The Company did not issue or sell any unregistered securities during
the quarter ended December 31, 1998, except for the following:
In November 1998, the Company granted options to purchase 12,200 shares of
common stock, in the aggregate, to three employees pursuant to the
Company's 1997 Stock Option Plan. These options vest at a rate of 20% per
year beginning November 1999, expire in November 2008 and are exercisable
at $10.375 per share, which was the market value of the Company's common
stock on the date the options were granted. These stock option grants were
made in reliance upon the exemptions from registration provided by Sections
4(2) and 3(b) of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. Additionally, the following selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31 (A)
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 26,341 $ 41,509 $ 71,584 $ 89,150 $ 140,984
Cost of services 21,355 33,230 57,238 71,986 115,079
-------- -------- -------- -------- ---------
Gross profit 4,986 8,279 14,346 17,164 25,905
Selling, general and administrative
expenses 4,489 5,341 7,764 8,703 14,714
Management fee expense 612 2,600 6,172 3,126 --
-------- -------- -------- -------- ---------
Operating profit (loss) (115) 338 410 5,335 11,191
Net interest income (expense) and
other (216) (396) (372) 933 2,254
-------- -------- -------- -------- ---------
Income (loss) before income taxes (331) (58) 38 6,268 13,445
Income tax expense -- -- 112 2,110 4,901
-------- -------- -------- -------- ---------
Net income (loss) $ (331) $ (58) $ (74) $ 4,158 $ 8,544
======== ======== ======== ======== =========
Basic and diluted net income per
share $ 0.62
Weighted average shares outstanding 13,828,571
Selected Operating Data:
Capital expenditures, net of proceeds $ 670 $ 2,104 $ 1,333 $ 3,191 13,927
Depreciation and amortization 588 873 1,438 1,829 2,852
Balance Sheet Data (December 31):
Working capital $ 434 $ 798 $ 2,895 $ 38,704 $ 38,336
Total assets 12,352 21,580 22,979 58,172 80,201
Total debt 3,288 7,294 6,475 664 4,225
Total stockholders' equity 3,006 3,798 7,103 46,006 54,133
(A) SELECTED UNAUDITED PRO FORMA
OPERATING DATA: YEAR ENDED DECEMBER 31
-----------------------------------------------
1994 1995 1996 1997
------ ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical net income (loss) $ (331) $ (58) $ (74) $ 4,158
Add back management fee expense 612 2,600 6,172 3,126
Less applicable income tax expense (105) (948) (2,204) (1,394)
------ ------- ------- -------
Net income $ 176 $ 1,594 $ 3,894 $ 5,890
====== ======= ======= =======
Basic and diluted net income per share $ 0.47
Weighted average shares outstanding 12,652,680
See Note 2 to the consolidated financial statements set forth herein for a
further description of pro forma adjustments. Pro forma presentation was not
applicable for the year ended December 31, 1998.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this Form 10-K
that are not statements of historical facts are forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. Forward-looking statements are preceded by
terms such as "may", "will", "should", "anticipates", "expects", "believes",
"plans", "future", "estimate", "continue", and similar expressions. The
following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, general economic conditions in the
Company's markets, the loss of the Company's principal client(s), the loss or
delayed implementation of a large project which could cause quarterly variation
in the Company's revenues and earnings, difficulties of managing rapid growth,
dependence on key personnel, dependence on key industries and the trend toward
outsourcing, risks associated with the Company's contracts, risks associated
with rapidly changing technology, risks of business interruption, risks
associated with international operations and expansion, dependence on labor
force, the year 2000 issue, and highly competitive markets. These factors
include risks and uncertainties beyond the Company's ability to control; and, in
many cases, the Company and its management cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by use of forward-looking statements. All forward-looking statements
herein are qualified in their entirety by the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"--"Factors That May Affect Future Results" appearing elsewhere in
this Form 10-K.
OVERVIEW
StarTek generates its revenues by providing process management services,
which encompass a wide spectrum of service platforms, including logistics
management (selection and management of suppliers), management of product
assembly and packaging, E-commerce order processing and fulfillment, Internet
support, product distribution, direct store distribution, warehouse services and
inventory management, inbound technical support and customer care teleservices,
telecommunications process management, and product order processing. The Company
recognizes revenues as process management services are completed. Substantially
all of the Company's significant arrangements with its clients for its services
generate revenues based, in large part, on the number and duration of customer
inquiries, and the volume, complexity and type of components involved in the
handling of clients' products. Changes in the complexity or type of components
in the product units assembled by the Company may have an effect on the
Company's revenues, independent of the number of product units assembled.
A key element of the Company's ability to grow is the availability of
capacity to readily provide for the needs of new clients and the increased needs
of existing clients. StarTek's capacity substantially expanded during 1998
through the opening of a 305,000 square-foot building in Clarksville, Tennessee,
a 35,000 square-foot building in Greeley, Colorado and a 22,000 square-foot
building in Laramie, Wyoming. These three facilities, all of which became
operational during 1998, together with the Company's previously existing
capacity, provided adequate capacity to accommodate the revenue and earnings
growth experienced by the Company during 1998. StarTek leases 46,350 square-feet
of building space in Grand Junction, Colorado, which is currently expected to
become operational during the second quarter of 1999. The Company also operates
from facilities in the United Kingdom and Singapore. Additionally, the Company
has announced plans to search for an additional facility, which is currently
expected to be operational during the second half of 1999. Management believes
StarTek's existing facilities are adequate for the Company's current operations,
but continued capacity expansion will be required to support continued growth.
Management intends to maintain a certain amount of excess capacity to enable it
to readily provide for the needs of new clients and the increased needs of
existing clients.
The Company's cost of services primarily includes labor,
telecommunications, materials, and freight charges that are variable in nature
and certain facility expenses. All other operating expenses, including expenses
attributed to technology support, sales and marketing, human resource management
and other administrative functions that are not allocable to specific client
services, are included in selling, general and administrative expenses, which
generally tend to be either semi-variable or fixed in nature.
From July 1992, through June 17, 1997, the Company operated as an S
corporation and, accordingly, was not subject to federal or state income taxes.
As an S corporation, in addition to general compensation for services rendered,
the Company historically paid certain management fees, bonuses and other fees to
the principal stockholders and/or their affiliates in amounts on an annual basis
which were approximately equal to the annual earnings of the Company, and all
such amounts were reflected as management fee expense in the consolidated
statement of operations. Upon receipt of such management fees and bonuses, the
principal stockholders historically contributed approximately 53% of such
amounts to the Company to provide the Company with necessary working capital,
with substantially all of the balance used to pay applicable federal and state
income taxes. The amounts so contributed are reflected in additional
paid-in-capital on the Company's consolidated balance sheets. Effective with the
closing of the Company's initial public offering, these management fees and
bonus arrangements were discontinued. See Note 1 to the consolidated financial
statements set forth herein.
9
11
Compensation has continued to be payable to certain principal
stockholders as general compensation for services rendered in the form of
salaries, bonuses, or advisory fees and all such payments are included in
selling, general and administrative expenses in the consolidated statement of
operations. At current rates, such payments aggregate approximately $516,000
annually. See Note 1 to the consolidated financial statements set forth herein.
The Company frequently purchases components of its clients' products as
an integral part of its supplier management services and in advance of providing
its product assembly and packaging services. These components are packaged,
assembled and held by StarTek pending shipment. The Company generally has the
right to be reimbursed from clients for unused inventories. Client-owned
inventories are not reflected in the Company's consolidated balance sheets. See
Note 1 and Note 4 to the consolidated financial statements set forth herein for
a further description of the Company's inventories.
RESULTS OF OPERATIONS
The following tables should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-K.
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data expressed as a percentage of revenues:
YEAR ENDED DECEMBER 31
----------------------------------------------
1996 1997 1998
--------------- ----------- ------------
Revenues 100.0% 100.0% 100.0%
Cost of services 80.0 80.7 81.6
--------------- ----------- ------------
Gross profit 20.0 19.3 18.4
Selling, general and administrative
expenses 10.8 9.8 10.4
Management fee expense 8.6 3.5 --
--------------- ----------- ------------
Operating profit 0.6 6.0 8.0
Net interest income ( expense) and other (0.5) 1.0 1.6
--------------- ----------- ------------
Income before income taxes 0.1 7.0 9.6
Income tax expense 0.2 2.3 3.5
--------------- ----------- ------------
Net income (loss) (0.1)% 4.7% 6.1%
=============== =========== ============
The following table sets forth certain unaudited pro forma consolidated
statement of operations data expressed in dollars and as a percentage of
revenues (dollars in thousands, except per share data) (b):
YEAR ENDED DECEMBER 31
---------------------------------------------------
1996 1997
------------------------ -------------------------
Revenues $ 71,584 100.0% $ 89,150 100.0%
Cost of services 57,238 80.0 71,986 80.7
-------------- ----------------
Gross profit 14,346 20.0 17,164 19.3
Selling, general and administrative expenses 7,764 10.8 8,703 9.8
-------------- ----------------
Operating profit 6,582 9.2 8,461 9.5
Net interest income ( expense) and other (372) (0.5) 933 1.0
-------------- ----------------
Income before income taxes 6,210 8.7 9,394 10.5
Income tax expense 2,316 3.3 3,504 3.9
-------------- ----------------
Net income $3,894 5.4% $5,890 6.6%
============== ================
Basic and diluted net income per share $ 0.34 $ 0.47
Weighted average shares outstanding 11,361,904 12,652,680
- -------------------------------
(b) See Note 2 to the consolidated financial statements set forth herein for a
further description of pro forma adjustments. Pro forma presentation was
not applicable for the year ended December 31, 1998.
10
12
1998 Compared to 1997
Revenues. Revenues increased $51.8 million, or 58.1%, from $89.2 million
for 1997 to $141.0 million for 1998. This increase was primarily due to an
increase in the volume of services provided to one of the Company's principal
clients, together with certain existing and new clients, partially offset by
decreases in the volume of services provided to other existing clients.
Cost of Services. Cost of services increased $43.2 million, or 59.9%, from
$71.9 million for 1997 to $115.1 million for 1998. As a percentage of revenues,
costs of services increased from 80.7% for 1997 to 81.6% for 1998. This
percentage increase was primarily due to higher overall costs of certain
business for a principal client at lower relative margins, mix of services
performed and training and start-up expenses related to the new Greeley,
Colorado, Laramie, Wyoming and Clarksville, Tennessee facilities, all of which
became operational during 1998.
Gross Profit. Due to the foregoing factors, gross profit increased $8.7
million, or 50.9%, from $17.2 million for 1997 to $25.9 million for 1998. As a
percentage of revenues, gross profit decreased from 19.3% for 1997 to 18.4% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.0 million, or 69.1%, from $8.7 million for
1997 to $14.7 million for 1998, primarily as a result of increased personnel
costs incurred to service increasing business and costs associated with capacity
expansion. As a percentage of revenues, selling, general and administrative
expenses increased from 9.8% for 1997 to 10.4% for 1998.
Management Fee Expense. Management fee expense was $3.1 million for 1997
and zero for 1998. Effective with the closing of the Company's initial public
offering in June 1997, management fees were discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased from $5.3 million for 1997 to $11.2 million for 1998. As a percentage
of revenues, operating profit increased from 6.0% for 1997 to 8.0% for 1998.
Net Interest Income and Other. Net interest income and other was $0.9
million for 1997 and $2.3 million for 1998. This increase was primarily a result
of an increase in interest income derived from cash equivalents and investments
available for sale balances during 1998, whereas there were line of credit and
substantially more capital lease borrowings outstanding during the first half of
1997, substantially all of which were repaid from the net proceeds received by
the Company from its June 1997 initial public offering.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $7.1 million, or 114.5%, from $6.3 million for
1997 to $13.4 million for 1998. As a percentage of revenues, income before
income taxes increased from 7.0% for 1997 to 9.6% for 1998.
Income Tax Expense. The Company was taxed as an S corporation for federal
and state income tax purposes from July 1, 1992 through June 17, 1997, when S
corporation status was terminated in contemplation of the Company's initial
public offering. Accordingly, the Company was not subject to federal or state
income taxes prior to June 17, 1997. During 1997, a provision for income taxes
as a C corporation was made for the period June 18, 1997 through December 31,
1997 as adjusted for a foreign tax benefit item, less a one-time credit to
record a net deferred tax asset of $0.3 million upon termination of S
corporation status. Income tax expense for 1998 reflects a provision for
federal, state and foreign income taxes at an effective rate of 36.5%.
Net Income. Based on the factors discussed above, net income increased $4.3
million, or 105.5%, from $4.2 million for 1997 to $8.5 million for 1998. As a
percentage of revenues, net income increased from 4.7% for 1997 to 6.1% for
1998.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Tax Expense and Pro Forma Net
Income for 1997 compared to actual results for 1998. Pro forma amounts for 1997
reflect the elimination of management fees and bonuses to stockholders and their
affiliates as these fees and bonuses were discontinued upon the closing of the
Company's June 1997 initial public offering, and provide for related income
taxes at 37.3% of pre-tax income as if the Company were taxed as a C corporation
for the entire year of 1997. Pro forma presentation was not applicable to 1998.
As a result of the foregoing factors: (i) pro forma management fee expense is
zero for 1997 and actual management fee expense is zero for 1998; (ii) pro forma
operating profit was $8.5 million for 1997 compared to actual operating profit
of $11.2 million for 1998, while such operating profit represented 9.5% and 8.0%
of revenues, respectively; (iii) income before income taxes increased $4.0
million, or 43.1%, from a pro forma amount of $9.4 million for 1997 to an actual
amount of $13.4 million for 1998; (iv) income tax expense increased $1.4
million, or 39.9%, from a pro forma amount of $3.5 million for 1997 to an actual
amount of $4.9 million for 1998; and (v) net income increased $2.6 million, or
45.1%, from a pro forma amount of $5.9 million for 1997 to an actual amount of
$8.5 million for 1998.
11
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1997 Compared to 1996
Revenues. Revenues increased $17.6 million, or 24.5%, from $71.6
million for 1996 to $89.2 million for 1997. This increase was primarily from
existing clients. A portion of the revenues for 1996 were attributable to two
large projects, which generated unusually high revenues.
Cost of Services. Cost of services increased $14.7 million, or 25.8%,
from $57.2 million for 1996 to $71.9 million for 1997. As a percent of revenues,
cost of services increased 0.7%. Factors pertaining to this increase were
decreased labor utilization, primarily from Greeley capacity restraints in
latter 1997, increased training costs and a greater penetration of business with
a large client at lower relative margins. These increased cost factors were
partially offset by the absence of start-up costs in Denver and product rework
cost as compared to 1996.
Gross Profit. As a result of the foregoing factors, gross profit
increased $2.8 million, or 19.6%, from $14.3 million for 1996 to $17.2 million
for 1997. As a percentage of revenues, gross profit decreased from 20.0% for
1996 to 19.3% for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million, or 12.0%, from $7.8 million for
1996 to $8.7 million for 1997, primarily as a result of increased personnel
costs incurred to service increasing business. As a percentage of revenues,
selling, general and administrative expenses decreased from 10.8% for 1996 to
9.8% for 1997, reflecting the spreading of fixed and semi-variable costs over a
larger revenue base.
Management Fee Expense. Management fee expense decreased $3.1 million,
or 49.3%, from $6.2 million for 1996 to $3.1 million for 1997. As a percentage
of revenues, management fee expense decreased from 8.6% for 1996 to 3.5% for
1997. Management fee expense was determined by the Board of Directors and
related primarily to changes in operating profit of the Company for 1996. The
Company paid management fees and bonuses of $3.1 million in the period from
January 1, 1997 through the closing of the Company's initial public offering in
June 1997, at which time these management fees and bonus arrangements were
discontinued. These management fee and bonus payments gave consideration to
operating profits and the effects of certain expense timing differences for book
and tax purposes.
Operating Profit. As a result of the foregoing factors, operating
profit increased $4.9 million, or 1200%, from $0.4 million for 1996 to $5.3
million for 1997. As a percentage of revenues, operating profit increased from
0.6% for 1996 to 6.0% for 1997.
Net Interest Income (Expense) and Other. Net interest income (expense)
and other was $0.4 million expense in 1996, while it was $0.9 million income for
1997. This increase in net interest earnings was primarily due to interest
earnings from the net proceeds of the Company's initial public offering in June
1997 and the substantial absence of line-of-credit borrowing during the third
and fourth quarters of 1997.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $6.3 million from zero for 1996 to $6.3
million for 1997. As a percentage of revenues, income before income taxes
increased from 0.1% for 1996 to 7.0% for 1997.
Income Tax Expense. The Company operated as an S corporation for
federal and state income tax purposes until termination of S corporation status
in connection with the Company's initial public offering. Accordingly, the
Company was not subject to federal or state income taxes through June 17, 1997.
A provision for foreign income taxes of $0.1 million was made in 1996. During
1997, a provision for income taxes as a C corporation was made for the period
June 18, 1997 through December 31, 1997, as adjusted for a foreign tax benefit
item, less a one-time credit to record a net deferred tax asset of $0.3 million
upon termination of S corporation status.
Net Income (Loss). Based on the factors discussed above, net income
increased $4.3 million, from $(0.1) million for 1996 to $4.2 million for 1997.
As a percentage of revenues, net income increased from (0.1)% for 1996 to 4.7%
for the year ended December 31, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income. Pro
forma amounts reflect the elimination of management fees and bonuses paid to
stockholders and their affiliates as these fees and bonuses were discontinued
upon closing of the Company's initial public offering, and provide for related
income taxes at 37.3% of pre-tax income as if the Company were taxed as a C
corporation. As a result of the foregoing factors: (1) pro forma management fee
expense is zero for 1996 and 1997; (2) pro forma operating profit increased $1.9
million, or 28.5% from $6.6 million for 1996 to $8.5 million for 1997; (3) pro
forma income before income taxes increased $3.2 million, or 51.3%, from $6.2
million in 1996 to $9.4 million for 1997; (4) pro forma income taxes increased
$1.2 million, or 51.4%, from $2.3 million 1996 to $3.5 million for 1997; and (5)
pro forma net income increased $2.0 million, or 51.3% from $3.9 million for 1996
to $5.9 million for 1997.
12
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LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded its
operations and capital expenditures primarily through cash flow from operations,
borrowings under various lines of credit, capital lease arrangements, short-term
borrowings from its stockholders and their affiliates and additional capital
contributions by its stockholders. In November 1997, the Company replaced its
previous $3.5 million line of credit with Norwest Business Credit, Inc. with a
$5.0 million revolving line of credit with Norwest Bank Colorado, N.A. (the
"Bank"), which matures on April 30, 1999. Borrowings under the line of credit
bear interest at the Bank's prime rate (7.75% as of December 31, 1998). Under
this line of credit, the Company is required to maintain working capital of
$17.5 million and tangible net worth of $25.0 million. The Company may not pay
dividends in an amount which would cause a failure to meet these financial
covenants. As of December 31, 1998, and the date of this Form 10-K, the Company
was in compliance with these financial covenants. Collateral for the line of
credit is the accounts receivable of certain of the Company's wholly-owned
subsidiaries. As of December 31, 1998, no amount was outstanding under the $5.0
million line of credit. The Company is currently expects to renew this line of
credit with the Bank under the same general terms and conditions provided for in
the arrangement described above.
The Company closed an initial public offering of common stock on June 24,
1997. The net proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $41.0 million. From the net proceeds,
the Company repaid substantially all of its outstanding indebtedness, which
included approximately $4.9 million of bank and mortgage indebtedness, $1.8
million of capital lease obligations and $8.0 million of notes payable to
principal stockholders arising from an S corporation dividend in an amount
approximating the additional paid-in capital and retained earnings of the
Company as of the closing date. The balance of the net proceeds (approximately
$26.3 million) was primarily used for working capital and other general
corporate purposes, including approximately $8.0 million for capital
expenditures to expand into new facilities and build-out of the Company's
existing facilities.
During the first half of 1998, the Company completed construction of and
began operating from a new 35,000 square-foot call center facility in Greeley,
Colorado (the "Greeley Facility"). The Company purchased the Greeley Facility in
order to expand its call center capacity. The total construction cost of the
Greeley Facility and related equipment was approximately $3.5 million (excluding
the cost of the land). The Company financed the land for the Greeley Facility
through a $0.3 million non-interest bearing ten year promissory note. The
principal balance of the ten year promissory note declines on an equal basis,
without payment, over ten years so long as the Company does not sell or transfer
the land or fail to continuously operate a customer service center thereon.
During 1998, the Company purchased a total of approximately $1.8 million in
equipment, leasehold improvements and other fixed assets in order to operate a
22,000 square-foot call center facility in Laramie, Wyoming in a leased
building. The Laramie call center became operational during the three months
ended June 30, 1998. An option to purchase the Laramie land and building for
$365,000 was exercised on October 30, 1998.
On July 8, 1998, the Company entered into certain financing agreements with
the Industrial Development Board of the County of Montgomery, Tennessee, (the
"Board") in connection with the Board's issuance to StarTek USA, Inc. of an
Industrial Development Revenue Note, Series A not to exceed $4.5 million (the
"Facility Note") and an Industrial Development Revenue Note, Series B not to
exceed $3.5 million (the "Equipment Loan"). The Facility Note bears interest at
9% per annum commencing on October 1, 1998, payable quarterly, and maturing on
July 8, 2008. Concurrently, the Company advanced $3.6 million in exchange for
the Facility Note and entered into a lease agreement, maturing July 8, 2008,
with the Board for the use and acquisition of a 305,000 square-foot process
management and distribution facility in Clarksville, Tennessee (the "Facility
Lease"). The Facility Lease provides for the Company to pay to the Board lease
payments sufficient to pay, when and as due, the principal of and interest on
the Facility Note due to the Company from the Board. Pursuant to the provisions
of the Facility Lease and upon the Company's payment of the Facility Lease in
full, the Company shall have the option to purchase the 305,000 square-foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004. As of December 31, 1998, the Company had used
approximately $3.9 million and $1.2 million of the Facility Note and Equipment
Loan, respectively, and correspondingly entered into further lease arrangements
with the Board.
All transactions related to the purchase of the notes by the Company from
the Board and the lease arrangements from the Board to the Company have been
offset against each other in the consolidated financial statements set forth
herein, and accordingly have no impact on the consolidated balance sheets. The
assets acquired are included in property, plant and equipment. Similarly, the
interest income and interest expense related to the notes and lease
arrangements, respectively, have also been offset. The lease payments are equal
to the amount of principal and interest payments on the notes, and accordingly
have no impact on the consolidated statements of operations.
13
15
On October 26, 1998, the Company entered into an equipment loan
agreement with a finance company, which matures on November 2, 2002. In
connection with the equipment loan, the Company received cash of $3.6 million in
exchange for providing, among other things, certain collateral which generally
consisted of equipment, furniture and fixtures used in the Company's business.
The equipment loan provides for interest at a fixed annual interest rate of 7.0%
and for the Company to pay forty-eight equal monthly installments, which in
aggregate total approximately $4.2 million. In addition to the collateral
described above, the Company granted to the finance company a secondary security
interest in certain of its wholly-owned subsidiaries' accounts receivable.
On February 16, 1999, the Company entered into an operating lease agreement
whereby the Company acquired use of 46,350 square-feet of building space in
Grand Junction, Colorado to be used by the Company for call center, general
office use and other services as appropriate for the general purposes of the
Company (the "Grand Junction Facility"). The term of the lease agreement
commences on April 1, 1999 and unless earlier terminated or extended, continues
until March 31, 2009. Pursuant to the terms of the lease agreement, the Company
was granted, among other things, (i) a right of first refusal to purchase the
property, of which the leased space is a part, during the lease term and (ii) a
right to terminate the lease agreement anytime after the end of the fifth year
by giving the landlord 180 day prior written notice to terminate. Assuming the
operating lease agreement is not terminated, future minimum rental commitments
in aggregate, excluding certain taxes and utilities as defined, total
approximately $1.1 million and are payable on a monthly basis from April 1999
through March 2009.
On February 18, 1999 and in connection with the Grand Junction Facility,
the Company ordered certain call center computer hardware and software with an
aggregate purchase price of approximately $0.8 million. Completion of
installation of this call center equipment is currently scheduled to occur
during the second quarter of 1999, when, it is currently expected, the Grand
Junction Facility will also become operational.
As of December 31, 1998, the Company had cash, cash equivalents, and
investments available for sale of $36.4 million, working capital of $38.3
million and net worth of $54.1 million. The Company's investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various real estate investment trusts and equity related mutual funds. Such
investments held by the Company could be materially and adversely affected by
(i) various domestic and foreign economic conditions, such as recessions,
increasing interest rates, adverse foreign currency exchange fluctuations,
foreign and domestic inflation, and other factors and (ii) the inability of
certain corporations to repay their debts, including interest amounts, to the
Company. See "Quantitative and Qualitative Disclosures About Market Risk", and
Note 1 and Note 3 to the consolidated financial statements set forth herein for
further discussions regarding the Company's cash and cash equivalents, and
investments available for sale.
Net cash provided by operating activities increased from $6.1 million
for 1997 to $13.1 million for 1998. This increase was primarily a result of
increases in net income, depreciation and amortization expense, various tax
related items, accounts payable, and accrued and other liabilities, partially
offset by increases in accounts receivable, inventories, and gain on sale of
assets.
Net cash used in investing activities was $10.5 million for 1997 and
$24.2 million for 1998. This increase was primarily due to increased purchases
of (i) property, plant and equipment, and (ii) investments available for sale,
partially offset by proceeds received from dispositions of certain fixed assets
and investments.
Net cash provided by financing activities during 1997 of approximately
$28.6 million was primarily the result of $41.0 million of net proceeds received
from the June 1997 initial public offering, $1.6 million in contributed capital
from certain S corporation stockholders prior to the June 1997 initial public
offering, and $1.5 million proceeds received from borrowings and capital lease
arrangements, partially offset by approximately $7.5 million of net repayments
of various debt obligations, and $8.0 million of cash dividends paid to certain
S corporation principal stockholders. Net cash provided by financing activities
during 1998 of $3.6 million primarily consisted of $3.7 million of net proceeds
received from an October 1998 equipment loan and other borrowings, partially
offset by approximately $0.1 million of principal payments for the October 1998
equipment loan and various capital lease obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom operations was not substantial during 1997 and 1998.
The terms of the Company's agreements with its clients and its foreign
subcontracts are typically in U.S. dollars except for certain of its agreements
related to its United Kingdom operations. In the past, the Company's exposure to
foreign currency exchange risks has been minimal in connection with its day to
day operations in the United Kingdom. However, as the international portion of
the Company's business grows, more revenues and expenses may be denominated in
foreign currency, and this will increase the Company's exposure to fluctuations
in currency exchange rates. See "Quantitative and Qualitative Disclosures About
Market Risk" set forth herein for a further discussion of the Company's exposure
to foreign currency exchange risks in connection with certain of its investments
available for sale.
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The Company believes its current cash, cash equivalents and investments
available for sale balances, anticipated cash flows from future operations and
the $5.0 million of currently available financing under its $5.0 million line of
credit, will be sufficient to support its operations, capital expenditures and
various repayment obligations under its debt and lease agreements for the
foreseeable future. However, liquidity and capital requirements depend on many
factors including, but not limited to, the Company's ability to retain or
successfully and timely replace its principal clients and the rate at which the
Company expands its business, whether internally or through acquisitions and
strategic alliances. To the extent the funds generated from the sources
described above are insufficient to fund the Company's activities in the short
or long-term, the Company will be required to raise additional funds through
public or private financing. No assurance can be given that additional financing
will be available or that, if available, it will be available on terms favorable
to the Company.
QUARTERLY RESULTS
Note 16 to the consolidated financial statements set forth herein
reflects certain unaudited statement of operations data for the quarters in 1997
and 1998 on a historical and pro forma basis. The unaudited historical quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments necessary to present fairly
the information for the quarters presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results"--"Variability of Quarterly Operating Results" set forth
herein for a further discussion of the Company's quarterly results.
For the quarterly periods in 1997 and 1998, revenues, cost of services
and gross profits fluctuated principally due to the seasonal pattern of certain
of the businesses served by the Company and an increase in the volume of
services provided to one of the Company's principal clients, together with
certain existing and new clients, partially offset by decreases in the volume of
services provided to other existing clients. Revenues, cost of services and
gross profit from the fourth quarter of 1997 to the first quarter of 1998
declined principally due to the seasonal pattern of certain businesses served by
the Company.
The following table sets forth certain unaudited historical and pro
forma statement of operations data, expressed as a percentage of revenues:
1997 QUARTERS ENDED 1998 QUARTERS ENDED
----------------------------------------- --------------------------------------------
MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31
----------------------------------------- --------------------------------------------
Historical:
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 23.6 21.9 19.4 16.0 18.8 19.0 18.4 18.0
Selling, general and
administrative expenses 13.0 12.1 10.6 6.8 11.2 13.3 11.0 8.6
Management fee expense 4.7 14.5 -- -- -- -- -- --
Operating profit (loss) 5.9 (4.7) 8.8 9.2 7.6 5.7 7.4 9.4
Net income (loss) 5.4 (4.0) 7.2 6.8 6.2 5.4 5.7 6.5
Pro forma:
Revenues 100.0% 100.0% -- -- -- -- -- --
Gross profit 23.6 21.9 -- -- -- -- -- --
Selling, general and
administrative expenses 13.0 12.1 -- -- -- -- -- --
Management fee expense -- -- -- -- -- -- -- --
Operating profit (loss) 10.6 9.8 -- -- -- -- -- --
Net income (loss) 6.3 5.8 -- -- -- -- -- --
Gross profit, as a percentage of revenues, increased 2.8% from the fourth
quarter of 1997 to the first quarter of 1998 as a result of the mix of services
performed and the absence of lower labor utilization and capacity constraints
related to the 100,000 square-foot Greeley facility, partially offset by
training and start-up expenses related to the 35,000 square-foot Greeley
facility.
Gross profit, as a percentage of revenues, decreased 4.8% from the first
quarter of 1997 to the first quarter of 1998 primarily as a result of higher
overall cost of services from greater penetration of business with certain
principal clients at lower relative margins, training and start-up expenses
related to the 35,000 square-foot Greeley facility and the mix of services
performed.
Gross profit, as a percentage of revenues, decreased 2.9% from the second
quarter of 1997 to the second quarter of 1998 primarily as a result of higher
overall cost of services of certain business at lower relative margins, mix of
services performed, and training and start-up expenses related to the 35,000
square-foot Greeley facility and the 22,000 square-foot Laramie facility, both
of which became operational in the second quarter of 1998.
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Gross profit, as a percentage of revenues, decreased 1.0% from the third
quarter of 1997 to the third quarter of 1998 primarily as a result of higher
overall costs of certain business at lower relative margins, mix of services
performed and training and start-up expenses related to the 305,000 square-foot
Clarksville, Tennessee facility, which became operational during the third
quarter of 1998.
Gross profit, as a percentage of revenues, increased 2.0% from the fourth
quarter of 1997 to the fourth quarter of 1998 primarily as a result of the
absence of lower labor utilization and capacity constraints related to the
100,000 square-foot Greeley facility. Operating from the 305,000 square-foot
facility in Clarksville, Tennessee substantially contributed to the relief of
the capacity constraints experienced by the Company during the fourth quarter of
1997. Gross profit, as a percentage of revenues, remained relatively consistent
for the quarterly periods in 1998.
For the quarterly periods in 1997, selling, general and administrative
expenses as a percentage of revenues, fluctuated principally due to the
spreading of fixed and semi-variable costs over a revenue base that fluctuates
from quarter to quarter. For the quarterly periods in 1998, selling, general and
administrative expenses as a percentage of revenues, fluctuated principally due
to increased personnel costs incurred to service increasing business and costs
associated with capacity expansion.
The Company paid management fees and bonuses of $3.1 million in the
period January 1, 1997 through the closing of the Company's initial public
offering in June 1997, at which time these management fees and bonus
arrangements were discontinued. These 1997 management fees and bonus
arrangements gave consideration to operating profits and the effects of certain
expense timing differences for book and tax purposes.
Operating profit fluctuated within the quarterly periods of 1997 and
1998 based primarily on the factors noted above. Net income fluctuated within
the quarterly periods of 1997 (pro forma quarterly results for the first two
quarters of 1997 and actual quarterly results for the last two quarters of 1997)
and 1998 (actual quarterly results for all quarters in 1998) based primarily on
the factors noted above, and based on an increase in interest earnings in 1998
derived from the Company's cash equivalents and investments available for sale,
partially offset by a provision for income tax expense in 1998 of 36.5%.
The unaudited pro forma quarterly information for the first two
quarters of 1997 presents the effects on operating profit of the elimination of
management fee expense paid to stockholders and their affiliates as these fees
were discontinued effective with closing of the Company's initial public
offering. See Note 2 to the consolidated financial statements set forth herein
for a further description of the 1997 pro forma information and related pro
forma adjustments. Pro forma presentation was not applicable for the quarterly
periods beginning after June 30, 1997.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of the
Company's older computer programs and technologies fall into this category. As a
result, those programs have time-sensitive applications that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in other normal business activities.
The Company formally created a year 2000 project team (the "Y2K Team")
during the first quarter of 1998. The Y2K Team reports directly to the Company's
executive committee and periodically provides the executive committee status
updates of its year 2000 compliance efforts. To date, the Y2K Team has, among
other things, completed its initial assessment of the Company's year 2000
compliance issues, identified non year 2000 compliant computer equipment and
software, communicated with applicable third party vendors of the Company in
order to gather information on year 2000 matters beyond the Company's internal
information technologies, scheduled and partially completed year 2000 testing of
the Company's applicable information systems, and planned to develop and test a
year 2000 contingency plan. The total cost of the Company's year 2000 compliance
efforts is currently estimated to be approximately $100,000.
The Company currently anticipates that the Y2K Team will complete its
year 2000 compliance efforts during the third quarter of 1999, which is prior to
any currently anticipated material adverse effect the year 2000 issue may have
on the Company's business, financial condition and results of operations.
Additionally, StarTek uses certain of its clients' software applications in
performing its outsourced services. Such client-owned software used by StarTek,
if not year 2000 compliant, could cause significant interruptions and delays in
the Company's services, revenues and cash receipts. Currently, management is
unaware of any specific year 2000 issues related to client-owned software used
in StarTek's day to day operations. The Company currently believes, based on its
current year 2000 compliance planning, the year 2000 issue will not pose
material adverse problems to its business. However, if the Company's, its third
party vendors', subcontractors' and clients' year 2000 compliance efforts are
not successful, or not completed in a timely manner, the year 2000 issue could
have a material adverse effect on the operations of the Company.
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The anticipated cost and timing to complete the year 2000 compliance
efforts mentioned above are based on estimates which have been derived using
numerous assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to completely identify and correct all relevant
information systems, the ability to coordinate successfully with its third party
vendors, subcontractors and clients in order to attempt to insure year 2000
issues beyond the Company's internal information systems are also successfully
and timely addressed, and other uncertainties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results" set forth herein for a further discussion of factors
relating to the Company's "Year 2000 Compliance".
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of domestic
and foreign inflation on its operations, the Company does not believe that
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on its results of operations or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Reliance on Principal Client Relationships
A substantial portion of the Company's revenue is generated from its
principal client(s) and the loss of its principal client(s) could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's two largest clients during the twelve and
three months ended December 31, 1997 were Microsoft Corporation ("Microsoft")
and Hewlett-Packard Company ("Hewlett-Packard"). Microsoft, which began its
outsourcing relationship with StarTek in April 1996, accounted for approximately
56.3% of the Company's revenues during the year ended December 31, 1997. The
Company provides various outsourced services to various divisions of
Hewlett-Packard, each of which the Company considers separate clients since each
division acts through a relatively autonomous decision maker. Hewlett-Packard's
various divisions accounted for approximately 25.4% of the Company's revenues
during the year ended December 31, 1997. The Company began its outsourcing
relationship with Hewlett-Packard in 1987. The Company's largest client during
the year ended December 31, 1998 was Microsoft. Microsoft accounted for
approximately 72.5% of the Company's revenues during the year ended December 31,
1998. There can be no assurance the Company will be able to retain its principal
client(s) or, if it were to lose its principal client(s), it would be able to
timely replace its principal client(s) with clients which generate a comparable
amount of revenues.
Variability of Quarterly Operating Results
The Company's business is highly seasonal and is, at times, conducted in
support of product launches for new and existing clients. Historically, the
Company's revenues have been substantially lower in the first and second
quarters due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season.
Additionally, the Company has experienced, and expects to continue to
experience, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of existing and future client product launches; (ii) the expiration or
termination of existing client projects; (iii) the timing and amount of costs
incurred to expand capacity in order to provide for further revenue growth from
current and future clients; (iv) the seasonal nature of certain clients'
businesses; (v) the cyclical nature of certain high technology clients'
businesses; and (vi) changes in the Company's principal client base.
Year 2000 Compliance
As the year 2000 approaches, an issue impacting all companies,
including StarTek, has emerged regarding how existing application software
programs, computer operating systems and other operating equipment which use
embedded computer chips can accommodate this date value. Software programs,
computer operating systems and other operating equipment that have
date-sensitive programming or embedded chips may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of StarTek's operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Similarly, disruptions in the
operations of StarTek's clients, third party vendors and/or subcontractors due
to the year 2000 issue could materially and adversely affect StarTek's
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Year 2000 Compliance" set forth herein for a further
discussion of the Company's year 2000 compliance efforts.
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Difficulties in Managing Business Undergoing Rapid Growth
StarTek has experienced rapid growth over the past several years and
anticipates continued future growth. Continued growth depends on a number of
factors, including the Company's ability to (i) initiate, develop and maintain
new and existing client relationships, particularly relationships with its
principal client(s); (ii) expand its sales and marketing organization; (iii)
recruit, motivate and retain qualified management, customer support and other
personnel; (iv) rapidly expand the capacity of its existing facilities or
identify, acquire or lease suitable additional facilities on acceptable terms
and complete build-outs of such facilities in a timely and economic fashion; (v)
provide high quality services to its clients; and (vi) maintain relationships
with high-quality and reliable suppliers. Continued rapid growth can be expected
to place significant strain upon the Company's management, employees,
operations, operating and financial systems, and other resources. To accommodate
such growth and to compete effectively, the Company must continue to implement
and improve its information systems, procedures, and controls and expand, train,
motivate, and manage its workforce. There can be no assurance that the Company's
personnel, systems, procedures, and controls will be adequate to support the
Company's future operations. Further, there can be no assurance the Company will
be able to maintain or accelerate its current growth, effectively manage its
expanding operations or achieve planned growth on a timely and profitable basis.
If the Company is unable to manage growth effectively or if growth does not
occur, its business, results of operations and financial condition could be
materially and adversely affected.
Risks Associated with Rapidly Changing Technology
Continued and substantial world-wide use and development of the
Internet as a delivery system for computer software, hardware, computer games,
other computer related products, and products in general could significantly and
adversely affect demand for the Company's services. Additionally, the Company's
success is significantly dependent on its computer equipment, telecommunications
equipment, software systems, operating systems, and financial systems. There can
be no assurance that the Company will be able to timely and successfully develop
and market any new services, that such services will be commercially successful
or that clients' and competitors' technologies or services will not render the
Company's services obsolete. Furthermore, the Company's failure to successfully
and timely implement sophisticated technology or to respond effectively to
technological changes in general, could have a material adverse effect on the
Company's success, growth prospects, results of operations and financial
condition.
Dependence on Labor Force
StarTek's success is largely dependent on its ability to recruit, hire,
train, and retain qualified employees. The Company's business is labor intensive
and continues to experience relatively high personnel turnover. The Company's
operations, especially its technical support teleservices, generally require
specially trained employees. Increases in the Company's employee turnover rate
could increase the Company's recruiting and training costs and decrease its
operating efficiency and productivity. Also, the addition of new clients or the
implementation of new projects for existing clients may require the Company to
recruit, hire, and train personnel at accelerated rates. There can be no
assurance that the Company will be able to successfully recruit, hire, train,
and retain sufficient qualified personnel to adequately staff for existing
business or future growth. In addition, because a substantial portion of the
Company's operating expenses consist of labor related costs, continued labor
shortages together with increases in wages (including minimum wages as mandated
by the U.S. federal government, employee benefit costs, employment tax rates,
and other labor related expenses) could have a material adverse effect on
StarTek's business, operating profit and financial condition. Furthermore,
certain of StarTek's facilities are located in areas with relatively low
unemployment rates and/or relatively high labor costs, thus potentially making
it more difficult and costly to hire qualified personnel.
Risks Associated with International Operations and Expansion
StarTek currently conducts business in Europe and Asia, in addition to
its North American operations. Such international operations accounted for
approximately 13.9% of the Company's total revenues for the year ended December
31, 1998. A component of the Company's growth strategy continues to be expansion
of its international operations. There can be no assurance that the Company will
be able to continue or expand its capacity to market, sell, and deliver its
services in international markets or that it will be able to develop
relationships with other businesses to expand its international operations.
Additionally, there are certain risks inherent in conducting international
business, including: (i) exposure to foreign currency fluctuations against the
U.S. dollar; (ii) potentially longer working capital cycles; (iii) greater
difficulties in collecting accounts receivable; (iv) difficulties in complying
with a variety of foreign laws and foreign tax regulations; (v) unexpected
changes in foreign government programs, policies, regulatory requirements and
labor laws; (vi) difficulties in staffing and effectively managing foreign
operations; and (vii) political instability and adverse tax consequences. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's international operations and, consequently, on
the Company's business, results of operations, growth prospects and financial
condition.
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Control by Principal Stockholders
As of March 24, 1999, A. Emmet Stephenson, Jr., Chairman of the Board
and co-founder of the Company, and his family, beneficially own approximately
66.2% of the Company's outstanding common stock. As a result, Mr. Stephenson and
his family will be able to elect the entire Board of Directors of the Company
and to control substantially all other matters requiring action by the Company's
stockholders. Additionally, substantially all of the Company's revenues,
operating expenses and operating results in general are derived from the
Company's wholly-owned subsidiaries. Mr. Stephenson is also the sole Director
for each of the Company's wholly-owned subsidiaries. Such voting concentration
may discourage, delay or prevent a change in control of the Company and its
wholly-owned subsidiaries.
Dependence on Key Personnel
The Company's success to date has depended in large part on the skills
and efforts of Mr. Stephenson and of Michael W. Morgan, President, Chief
Executive Officer, Director and co-founder of the Company. As of March 24, 1999,
Mr. Stephenson and his family and Mr. Morgan beneficially own approximately
66.2% and 7.0% of the Company's outstanding common stock, respectively. Mr.
Stephenson and Mr. Morgan have not entered into employment agreements with the
Company and there can be no assurance that the Company can retain the services
of these individuals. The loss of either Mr. Stephenson or Mr. Morgan, or the
Company's inability to hire or retain other qualified officers, directors and
key employees, could have a material adverse effect on the Company's success,
growth prospects, results of operations and financial condition.
Dependence on Key Industries and Trends Toward Outsourcing
StarTek's current client base primarily consists of companies engaged
primarily in the computer software, computer hardware, Internet, E-commerce,
technology and telecommunications industries. The Company's business and growth
is largely dependent on the continued demand for its services from clients in
these industries and industries targeted by the Company, and current trends in
such industries to outsource various non-core functions which are offered on an
outsourced basis by the Company. A general economic downturn in the computer
industry or in other industries targeted by the Company or a slowdown or
reversal of the trend in these industries to outsource services provided by the
Company could materially and adversely affect the Company's business, results of
operations, growth prospects and financial condition.
Risks Associated with the Company's Contracts
The Company typically enters into written agreements with each client for
outsourced services or performs services on a purchase order basis. Under
substantially all of the Company's significant arrangements with its clients,
including its principal clients, the Company typically generates revenues based
in large part, on the number and duration of customer inquiries, and the volume,
complexity, and type of components involved in its clients' products.
Consequently, the amount of StarTek's revenues generated from any particular
client is generally dependent upon customers' purchase and use of its clients'
products. There can be no assurance as to the number of customers who will be
attracted to the products of the Company's clients or that the Company's clients
will continue to develop new products that will require the Company's services.
Although the Company currently seeks to sign multi-year contracts with its
clients, the Company's contracts generally (i) permit termination upon
relatively short notice by its clients, (ii) do not designate the Company as its
clients' exclusive outsourcing service provider, (iii) do not penalize its
clients for early termination, and (iv) generally hold the Company responsible
for work performed which does not meet certain pre-defined specifications. To
the extent the Company works on a purchase order basis, agreements with its
clients frequently do not provide for minimum purchase requirements, except in
connection with certain of its technical support and customer care services.
Several of the Company's contracts require the Company, through its wholly-owned
subsidiaries and for certain of its facilities and services, to maintain ISO
9002 certification.
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Highly Competitive Market
The markets in which the Company operates are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include small firms offering specific applications,
divisions of large companies, large independent firms and, most significantly,
the in-house operations of the Company's existing and potential clients. A
number of competitors have or may develop financial and other resources greater
than those of the Company. Similarly, there can be no assurance that additional
competitors with greater name recognition and resources than the Company will
not enter the markets in which the Company operates. Because the in-house
operations of the Company's existing and potential clients are significant
competitors of the Company, the Company's performance and growth could be
materially and adversely affected if its clients decide to provide in-house
services that currently are outsourced or if potential clients retain or
increase their in-house capabilities. Further, a decision by its principal
client(s) to consolidate its outsourced services with a company other than
StarTek could materially and adversely affect the Company's business,
particularly due to the fact that the Company is not the largest supplier of any
of the services it currently provides to its principal client(s). Additionally,
competitive pressures from current or future competitors could result in
substantial price erosion, which could materially and adversely affect the
Company's business, results of operations and financial condition.
Risks of Business Interruptions
StarTek's operations are dependent upon its ability to protect its
facilities, clients' products, confidential client information, computer
equipment, telecommunications equipment, and software systems against damage
from Internet interruption, fire, power loss, telecommunications interruption,
E-commerce interruption, natural disaster, theft, unauthorized intrusion,
computer viruses, and other emergencies and the ability of its suppliers, to
deliver component parts on an expedited basis. While the Company maintains
certain procedures and contingency plans to minimize the detrimental impact of
such events, there can be no assurance that such procedures and plans will be
successful. In the event the Company experiences temporary or permanent
interruptions or other emergencies at one or more of its facilities, the
Company's business could be materially and adversely affected and the Company
may be required to pay contractual damages to its clients or allow its clients
to terminate or renegotiate their arrangements with the Company. While the
Company maintains property and business interruption insurance, such insurance
may not adequately and/or timely compensate the Company for all losses that it
may incur. Further, some of the Company's operations, including
telecommunication systems and telecommunication networks, and the Company's
ability to timely and consistently access and use 24 hours per day, seven days
per week, telephone, Internet, E-commerce, E-mail, facsimile connections, and
other forms of communication, are substantially dependent upon telephone
companies, Internet service providers, T1 lines, etc. If such communications are
interrupted on a short or long-term basis, the Company's services would be
similarly interrupted and delayed.
Volatility of Stock Price
The market price of StarTek's common stock may be highly volatile and
could be subject to wide fluctuations in response to quarterly variations in
operating results, the success of the Company in implementing its business and
growth strategies, announcements of new contracts or contract cancellations,
announcements of technological innovations or new products and services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. Additionally, the stock market has
experienced substantial price and volume fluctuations that have particularly
affected the market prices of equity securities of many companies, and that have
often been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of StarTek's common
stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Any such litigation initiated against the
Company could result in substantial costs and diversion of management's
attention and resources, which could materially and adversely affect the
Company's business, results of operations and financial condition.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related
to changes in interest rates and other general market risks, equity market
prices, and foreign currency exchange rates. Primarily all of the Company's
investment decisions are directed by its Chairman of the Board. This discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results could vary materially as a result of a number of factors,
including but not limited to, changes in interest rates and other general market
risks, equity market prices, foreign currency exchange rates, and those set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Factors That May Affect Future Results". See also Note
1 and Note 3 to the consolidated financial statements set forth herein for a
further discussion of the Company's cash and cash equivalents and investments
available for sale.
Interest Rate Sensitivity and Other General Market Risks
Cash and cash equivalents. As of December 31, 1998, the Company had cash
and cash equivalents of approximately $19.6 million, which consisted of (i)
approximately $1.4 million invested in various money market funds and overnight
investments at a weighted average interest rate of approximately 5.5%, (ii)
approximately $17.9 million invested in various commercial paper securities at a
weighted average interest rate of approximately 6.1%, and (iii) approximately
$0.3 million in various non-interest bearing operating accounts. StarTek
considers cash equivalents to be short-term, highly liquid investments that are
readily convertible to known amounts of cash and so near their maturity that
they present insignificant risk of changes in value because of changes in
interest rates. The Company does not expect any material loss with respect to
its cash and cash equivalents as a result of interest rate changes, and the
estimated fair value of its cash and cash equivalents approximates original
cost.
Investments Available for Sale. As of December 31, 1998, the Company had
investments available for sale of $16.8 million. These investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various equity related mutual funds. Corporate bonds , foreign government
bonds denominated in U.S. dollars, bond related mutual funds, and other debt
securities held in the Company's investment portfolio are subject to interest
rate risk and will fall in value if market interest rates increase.
The fair market value of, and the estimated cash flows from, the Company's
investments in corporate bonds are substantially dependent upon the
creditworthiness of certain corporations that are expected to repay their debts,
including interest, as they become due, to the Company. If such corporations'
financial condition and liquidity adversely changes, the Company's investments
in their debts can be expected to be materially and adversely affected.
The Company's investments in foreign government bonds denominated in U.S.
dollars entail special risks of global investing; these include, but are not
limited to, (i) currency exchange fluctuations which could adversely affect the
ability of foreign governments to repay their debts in U.S. dollars, (ii)
foreign government regulations, and (iii) the potential for political and
economic instability. The fair market value of such investments in foreign
government bonds (denominated in U.S. dollars) can be expected to be more
volatile than that of U.S. government bonds. These risks are intensified for the
Company's investments in debt of foreign governments located in countries
generally considered to be emerging markets.
The table below provides information about maturity dates and corresponding
weighted average interest rates with regard to certain of StarTek's investments
available for sale as of December 31, 1998.
EXPECTED MATURITY DATE
WEIGHTED AVERAGE --COST--
INTEREST RATES (DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------ -------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Corporate bonds 8.3% $ 1,063 -- -- -- -